Megatrends

The most influential Megatrends set to shape the world through 2030, identified by Euromonitor International, help businesses better anticipate market developments and lead change for their industries.

Boom to Struggle: Changing Prospects of Cognac in China

Up until 2013, selling cognac in China was considered to be one of the sure fire ways of generating great revenues and profits. Between 2007-2012 volume sales grew by 119% (14.8 million litres), with retail sales up by 186% (RMB31 billion, US$5 billion). Cognac benefitted from its highly prestigious image in China and the Chinese culture of gift-giving to nurture relationships, especially with government officials and other businesses. Both factors boosted the luxury end of the cognac category. There seemed little doubt that growth would continue.

Problems Taking Time to Appear

Even when, in October 2012, the Chinese president, Xi Jinping, announced a clampdown on government extravagance and corruption, in early 2013, cognac producers and distributors were still optimistic that the category would return to healthy growth and last year’s Euromonitor International’s forecast growth of 15% volume CAGR (27 million litres) and 16% value CAGR (RMB53.5 billion) between 2012-2017 reflected those views. The consensus opinion was that cognac’s strong image and long presence in the country would shield the category from the brunt of any negative effect, unlike the less well-established blended Scotch.

However, the anti-extravagance push has had a more deleterious effect on cognac sales than expected and has substantially curbed “gifting” by business executives offering luxury gifts to officials, who increasingly dare not accept them. Nor has it been helped by a slowing economy and investigations into the links between some on-trade establishments and prostitution.

Key to companies not forecasting this steep decline was that cognac was a very small part of the gifting, with very high end baijiu accounting for the majority of it. However, following the crackdown, baijiu producers, in an attempt to maintain sales, dramatically lowered prices on their products, which had a knock on effect on cognac.

These effects have taken a long time to work through. Indeed, even up until the latter half of 2013, the drinks trade in China was still relatively optimistic. A major factor in this time lag is the complexity of the Chinese distribution system, where with four layers of distributors, it takes even local distribution operations of multinationals time to feel the effects.

Nevertheless, by the start of 2014, the damage was starting to be seen and has led Euromonitor International to revise its forecast for the category, so that between 2013-2018, volume and value CAGRs are expected to be just 2% (1.9 million litres, RMB3.6 billion), with volumes down 12% in 2013 and expected to be down 8% in 2014, and no returning to (slight) volume growth until 2016.

The other two major companies also suffered. In China, Pernod’s total shipments and total revenues fell 17% and 18% respectively in the six months to December 2013, with global cognac shipments down 8%. LVMH seems to have got off best due to its more balanced channel focus in the country with a greater focus on Chinese nightclubs and more balanced geographic spread than either Pernod or Rémy Cointreau.

The dramatic changes in fortunes of particular categories or countries show that broad geographic and category spread is key for sustained corporate and brand health. As many companies found with their focus on southern European markets such as Spain and Greece before the great recession, or consumers switching way from premium blended Scotch in South Korea, or high-end cognac in China; putting too much emphasis on one area might have short to medium term benefits, but is likely to lead to longer term difficulties.